Tax Law: Fairness And Equality Under Scrutiny

Tax fairness is a concept that asserts that a government's tax system should be equitable to all citizens. However, opinions vary on how to achieve tax fairness, with solutions falling under three broad systems of taxation: regressive, progressive, and blended taxation. Advocates of regressive taxation argue for uniformity, while proponents of progressive taxation believe that the richest can afford to contribute more to a system that has benefited them disproportionately. In reality, most tax authorities blend these approaches, and the debate around tax fairness continues to divide taxpayers, policymakers, and economists.

Progressive vs. regressive taxation

The concept of tax fairness holds that a government's tax system should be equitable to all citizens. However, opinions differ on how to achieve this fairness. Three broad systems of taxation are generally proposed: regressive, progressive, and blended taxation.

Progressive Taxation

Progressive taxation is defined as a system where the tax rate increases as the payer's income increases. In other words, individuals with higher incomes are taxed at a higher rate than those with lower incomes. Progressive taxes include income taxes and estate taxes. The intention of a progressive tax is to ensure that lower-income earners pay a lower effective rate, allowing them to keep a greater percentage of their earnings. This, in theory, fuels economic activity as low-wage earners spend a greater percentage of their income on essential goods and services. The US federal income tax is a form of progressive taxation.

Regressive Taxation

Regressive taxation is a system where everyone pays the same tax for the same goods and services. The rate of taxation increases as the payer's income decreases, meaning low-income earners pay a larger percentage of their income than high-income earners. Examples of regressive taxes include sales tax, excise tax, and payroll tax. Sales taxes, for instance, are based on the cost of a product rather than the income of the individual purchasing it, resulting in low-income earners paying a greater portion of their total income. Excise taxes are levied on specific goods such as tobacco, alcohol, and luxury items, and are often added to the price of the goods.

Blended Taxation

In practice, most tax authorities blend regressive and progressive taxes. While the US federal income tax is progressive, the FICA tax is regressive. Many states have a progressive income tax but also impose a regressive state sales tax.

Tax fairness and individual rights

Tax fairness is a complex issue that divides taxpayers, policymakers, and economists. At its core, the concept of tax fairness advocates for a government tax system that treats all citizens equitably. However, opinions vary on how to achieve this fairness, with three broad systems of taxation often considered: regressive taxation, progressive taxation, and blended taxation.

Regressive Taxation

Regressive taxation treats everyone the same, regardless of their ability to pay. As a result, the poor may pay a higher rate than the rich relative to their disposable income. For example, a flat income tax of 15% would mean a family earning $180,000 pays $27,000, while a family with an income of $30,000 pays $4,500. In this case, the lower-income family's standard of living is more affected, while the richer family remains relatively untouched.

Progressive Taxation

Progressive taxation, on the other hand, charges higher tax rates on higher amounts of income. The intention is to have lower effective tax rates for lower-income earners and higher rates for higher-income earners. The US income tax system is progressive, with rates ranging from 0% to 37%. However, this does not mean that a person with a higher income pays 37% of their income in taxes. Instead, the highest percentage is only levied on the portion of income that exceeds certain levels. Progressive taxes often include exemptions, deductions, and credits that benefit specific groups, such as parents with dependent children. They also stimulate economic activity by allowing low-wage earners to retain a greater percentage of their earnings, which they then spend on essential goods and services.

Blended Taxation

In practice, most tax authorities blend regressive and progressive taxes. For example, a state may have a regressive sales tax but also impose a progressive income tax.

Individual Rights and Tax Fairness

The right to a fair and just tax system is a fundamental principle upheld by tax authorities like the US Internal Revenue Service (IRS). The IRS's Taxpayer Bill of Rights outlines ten basic rights, including the right to quality service, the right to pay no more than the correct amount of tax, the right to privacy, and the right to retain representation. These rights aim to protect taxpayers and ensure they are treated fairly and impartially by the tax administration.

The concept of tax fairness also considers the balance between individual rights and societal needs. A tax regime focused on individual fairness may allow citizens to retain most of their income or wealth since it is their property. However, this approach may result in numerous exemptions for special cases, as interest groups lobby for specific tax treatments. Determining who are the "most deserving" individuals is also a challenge, with arguments being made for both the poorest and the richest.

In contrast, a tax regime prioritizing societal fairness may emphasize the redistribution of wealth. This could include high inheritance taxes on generational wealth or higher taxes for high earners to align their pay with other workers. Closing loopholes that allow certain individuals or corporations to avoid paying taxes is another aspect of societal fairness.

In conclusion, tax fairness is a multifaceted issue that requires balancing individual rights with societal needs. While opinions differ on the best approach, most agree that a fair tax system should consider an individual's ability to pay while also addressing the needs of society as a whole.

Tax fairness and societal benefit

Tax fairness is a complex topic that sparks debate among taxpayers, policymakers, and economists. At its core, the concept of tax fairness advocates for a government tax system that treats all citizens equitably. However, opinions vary on how to achieve this fairness, with three broad systems of taxation often considered: regressive taxation, progressive taxation, and blended taxation.

Regressive Taxation

Regressive taxation treats everyone the same, regardless of their financial situation. This approach can be considered unfair to those with lower incomes, as they pay a higher rate relative to their disposable income. For example, a flat tax of 15% would mean a family earning $180,000 pays $27,000, while a family with an income of $30,000 pays $4,500. The former can likely maintain their standard of living, while the latter may struggle.

Progressive Taxation

Progressive taxation charges higher rates on higher amounts of income. This system aims to ensure that those with higher incomes contribute more to the system that has benefitted them. In the United States, the income tax is progressive, with rates ranging from 0% to 37%. This doesn't mean that a person with a high income pays 37% of their income in taxes; instead, the highest percentage is only levied on income exceeding a certain level.

Blended Taxation

In practice, most tax authorities blend regressive and progressive taxes. For instance, a state may have a sales tax (regressive) and also impose a progressive income tax. The federal government in the United States follows this blended approach, with a progressive income tax and a flat FICA payroll tax.

Societal Benefits

The debate around tax fairness centres on balancing the rights of the individual with the needs of society. Progressive taxation, for instance, can be seen as a means to redistribute wealth and bring high earners' pay in line with other workers. It also fuels economic activity, as low-wage earners spend a greater percentage of their income on essential goods and services. On the other hand, regressive taxation ensures that everyone contributes the same amount for the same goods and services.

In conclusion, while opinions differ on how to achieve tax fairness, the ultimate goal is to create a system that is equitable to all citizens. This involves considering both the ability of individuals and companies to pay taxes, as well as the societal benefits received from those taxes.

Tax loopholes

The concept of tax fairness dictates that a government's tax system should be equitable to all citizens. However, the existence of tax loopholes allows certain individuals and corporations to avoid paying taxes altogether. These loopholes are defended by those who believe they deserve special treatment.

In addition to complex partnership structures, individuals also attempt to exploit loopholes in various ways. For example, a client may claim that they don't have to pay taxes on their short-term rental business because it is listed on Airbnb, or they may try to deduct expenses for a beachfront condo used for a "shareholder meeting" and even claim "lost rental income" for the same period. Others may attempt to write off expenses for a car or a camping trip, blurring the line between personal and business expenses. While some of these attempts may be unsuccessful, they highlight the creativity of taxpayers in identifying and exploiting potential loopholes.

To address these issues, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have announced initiatives to close loopholes and ensure that wealthy taxpayers pay their fair share. These initiatives include regulatory efforts to stop large partnerships from using opaque business structures to avoid taxes, as well as increased reporting requirements for taxpayers and their advisers engaging in abusive partnership basis-shifting transactions.

Taxpayer rights

In 2014, the IRS adopted a Taxpayer Bill of Rights, which applies to all taxpayers in their dealings with the IRS. The bill outlines ten fundamental rights that all taxpayers should be aware of:

• The Right to Be Informed: Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the law and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They also have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.
• The Right to Quality Service: Taxpayers have the right to receive prompt, courteous, and professional assistance in their interactions with the IRS. They should be spoken to in a respectful and easily understandable manner and have the right to file a complaint for poor service.
• The Right to Pay No More than the Correct Amount of Tax: Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties. They also have the right to have the IRS apply all tax payments properly.
• The Right to Challenge the IRS's Position and Be Heard: Taxpayers can raise objections and provide additional documentation in response to formal IRS actions or proposed actions. The IRS is obliged to consider these objections and documentation promptly and fairly and provide a response if it disagrees with the taxpayer's position.
• The Right to Appeal an IRS Decision in an Independent Forum: Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including penalties. They generally have the right to take their cases to court and receive a written response regarding the appeal decision.
• The Right to Finality: Taxpayers have the right to know the time limits for challenging the IRS's position and for the IRS to audit a particular tax year or collect a tax debt. They also have the right to be informed when an audit is complete.
• The Right to Privacy: Taxpayers can expect any IRS inquiry, examination, or enforcement action to comply with the law and be no more intrusive than necessary. The IRS is obliged to respect the taxpayer's due process rights, including search and seizure protections, and provide a collection due process hearing where applicable.
• The Right to Confidentiality: Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed without their authorization or as required by law. They can also expect the IRS to take appropriate action against those who wrongfully use or disclose their return information.
• The Right to Retain Representation: Taxpayers can choose to be represented by an authorized representative of their choice when dealing with the IRS. If they cannot afford representation, they have the right to know that they may be eligible for assistance from a Low-Income Taxpayer Clinic.
• The Right to a Fair and Just Tax System: Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information in a timely manner. They can seek assistance from the Taxpayer Advocate Service if they face financial difficulties or if the IRS has not resolved their tax issues properly and promptly through its normal channels.

These rights are designed to ensure that taxpayers are treated fairly and justly by the IRS and that they have the necessary information and resources to understand and comply with tax laws.

Frequently asked questions